Complications with new housing supply & affordability lead to build-to-rent

Property Markets / Outlook

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In a recent maneuver, the NSW government and planning minister Anthony Roberts has handed approval and gazettal responsibility from State Government to the Inner West and Canterbury-Bankstown local councils.

The Inner Western corridor was slated for a mass rezoning for 35,000 new homes, including listed developer Mirvac who had proposed a $1.3 billion residential development on Carrington Road in Marrickville. The plans are for 20 buildings, with 2600 homes in 28-story towers.

Federal Labor MP Anthony Albanese’s electorate of Grayndler was directly affected by the proposed gazettal, and a meeting on the 27th July with the NSW planning Minister, Anthony Roberts and Inner West Mayor Darcy Byrne secured the policy change for the rezone.

“The simple fact is the Sydenham to Bankstown strategy as it previously stood has been a catalyst for the worst kind of developer-imposed rezoning proposals,” Mr Albanese said to 9 MSN.

“The community will develop the plans, where the buildings will go, where the new homes will go, where the new parks will be,” Mr Roberts said.

In a statement to 9 MSN a representative of the local council, Cr Byrne said: Today’s decision puts an end to Mirvac’s ridiculous proposal. This is suburban Sydney, not downtown Hong Kong.”

According to 9 MSN, political and community pressure left Planning Minister Anthony Roberts no choice but to scrap it.

Real estate credit restrictions implemented as a result of the APRA and Royal Commission, which include new Responsible Lending Criteria, have slowed the residential buyer and developer market significantly. Whilst it’s a prudent measure from the major banks in reducing debt levels, its compounded the housing affordability issues present specifically in Sydney.

In addition to the complicated politics surrounding new supply, as exemplified with the handover of the inner western corridor gazettal, the new supply of housing for a population of 25 million - growing at half a million people a year - with a total of 10 million dwellings, would appear insufficient to accommodate growth.

Evolution of the residential market.

According to the Australian Financial Review, Mirvac has reported profits of $1bn for the year and has suggested that their defaults on residential sales are sitting at about 2% due to the quality of the product and focus on owner-occupiers. Mirvac’s residential business has earned them $318 million and gross margins on their development product of 25%, with a total of 3400 lots sold in the fiscal year.

Their plan for the coming years is to focus on the industrial and commercial sectors – they currently have a number of new A-grade commercial buildings coming out of the ground in the Sydney CBD. Additionally, their focus is on the more patient-capital-focused build-to-rent sector, which they see as a significant and growing segment of their future portfolio. Mirvac's first build to rent project is underway with a 258- unit project which is due to be completed in 2021. They plan to build a $750m-plus build-to-rent portfolio.

According to JP Morgan analysis, Mirvacs $2.2b in residential presales will bolster earnings to 2020. Earnings this year were down on last year, which is suggested to be as a result of timings with a slower residential market and slow planning approval processes.

Build to rent.

Whilst the capital structure of build-to-rent is commercially viable in America, in Australia, the sector of the market is still establishing. Whilst culturally it’s been the great Aussie dream to own your own home, the market dynamics may make owning a home prohibitively expensive given the restrictions on new supply and systemic affordability issues.

Sydney population is forecast to grow from 7.7 million today to 9.9 million in 2036, to over 12 million by 2056. This growth is driven primarily by the requirement to build sufficiency in the segment of the taxpaying population to offset the cost burden of the growing ratios of an aging population.

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